2. By highlighting remaining gaps in the macro-prudential architecture – that is, the regulatory and supervisory structure aimed at ensuring the safety and soundness of the financial system -- Deutsche Bank's travails also put central banks and regulators on the spot, yet again. This exposes them to greater threat of political interference at a time when there are already lots of questions and growing irritation at the ECB’s use of negative policy interest rates and its balance sheet for large-scale asset purchases.
3. Renewed concerns about European banks are likely to be yet another headwind to the region's already-tentative growth prospects. Expect European financial institutions to become more prudent as they place balance-sheet robustness ahead of making loans, especially when it comes to lending to small- and medium-sized enterprises. History shows that such shifts cannot be easily compensated for by central banks and governments.
4. Because of the inherent interconnectivity of banking operations, the risk of equity and bond market contagion is greater than for most other sectors. In combination with the spread of hybrid securities, such as contingent convertible bonds that initially act as internal amplifiers, Deutsche Bank's difficulties transmits volatility to other banks' capital structure, potentially enlarging the group of institutions that attract short-sellers. In turn, this raises the possibility of broader market instability.
The benefits of stabilizing Deutsche Bank extend well beyond one institution that is being forced to redefine its business model by internal and external challenges. Fortunately, there still are tools for restoring stability. And while a Lehman moment is unlikely, time is running short for Europe and the banking sector to contain and minimize the risk of other collateral damage and unintended consequences.
Mohamed A. El-Erian is a Bloomberg View columnist. He is the chief economic adviser at Allianz SE and chairman of the President’s Global Development Council, and he was chief executive and co-chief investment officer of Pimco.
This column was provided by Bloomberg News.